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MINUTES LEAGUE OF ARIZONA CITIES AND TOWNS EXECUTIVE COMMITTEE MEETING Friday, November 3, 2017 at 10:00 a.m. League of Arizona Cities and Towns 1820 W. Washington St. Phoenix, Arizona MEMBERS President Jay Tibshraeny, Mayor, Chandler Thomas L. Schoaf, Mayor, Litchfield Park Ed Honea, Mayor, Marana Vice President John Giles, Mayor, Mesa Mark Nexsen, Mayor, Lake Havasu City Satish Hiremath, Mayor, Oro Valley Cathy Carlat, Mayor, Peoria Treasurer Daniel Valenzuela, Councilmember, Phoenix* Christian Price, Mayor, Maricopa * Gail Barney, Mayor, Queen Creek W.J. "Jim" Lane, Mayor, Scottsdale Doug Von Gausig, Mayor, Clarkdale Daryl Seymore, Mayor, Show Low Lana Mook, Mayor, El Mirage Rick Mueller, Mayor, Sierra Vista Coral Evans, Mayor, Flagstaff Sharon Wolcott, Mayor, Surprise* Linda Kavanagh, Mayor, Fountain Hills Mark Mitchell, Mayor, Tempe Jenn Daniels, Mayor, Gilbert Bob Rivera, Mayor, Thatcher Jerry Weiers, Mayor, Glendale Jonathan Rothschild, Mayor, Tucson* Georgia Lord, Mayor, Goodyear Douglas Nicholls, Mayor, Yuma+ *Not in Attendance + Attended via phone President Jay Tibshraeny called the meeting to order at 10:04 a.m. He invited the Executive Committee to join him in the Pledge of Allegiance. President Tibshraeny proceeded to welcome new Executive Committee members; Mayor Coral Evans of Flagstaff, Mayor Satish Hiremath of Oro Valley and Mayor Gail Barney of Queen Creek. 1. REVIEW AND ADOPTION OF MINUTES Mayor Mark Nexsen moved to approve the minutes of the August 23, 2017 Executive Committee Meeting; Mayor Bob Rivera seconded the motion and it carried unanimously. 1 2. LEGISLATIVE POLICY DISCUSSION President Tibshraeny asks Executive Director, Ken Strobeck, to introduce the Legislative Policy Discussion. Mr. Strobeck invited League Pension Policy Analyst, Nick Ponder, to provide a PSPRS update. Mr. Ponder discussed the legislative pension ad-hoc committee that went to Globe, Yuma, Flagstaff, Bisbee and Phoenix. He educated the committee on the history of the PSPRS system, how it got to where it is today, and what the prospects are moving forward. The ad-hoc committee made three relatively benign recommendations. The first recommendation was a new audit of PSPRS, there was one audit done by the Auditor General in 2015, but this was done before Tier 3 was implemented. The second item was additional reporting for the actuarial report. He found that the information the legislator was requesting is already in the actuarial report. If there is additional information that needs to be identified in that report, a mandate can be created through legislation or simply ask PSPRS for the information. The third legislative item was a request to re-form the ad-hoc committee in the 54th legislative session, which would begin in 2019. In addition, Mr. Ponder has been traveling around the state talking to councils including Globe, Casa Grande and Yuma. He has also spoken to the Apache/Navajo mayors as well as Greater Arizona Mayor’s Association (GAMA) and presented to GFOAz. Mr. Ponder is educating people from a League perspective as an independent perspective as to how PSPRS got to where it is today and what to do moving forward. The most common questions at council meetings are; when are contribution rates going down? Do you think that Tier 3 is a fix? The state helped create this problem, when are they going to give us money to help fix it, or stop taking the money that should be put towards it? In regard to contribution rates, PSPRS backloads cost when completing their valuations because salary growth is expected over time. The contribution rates will increase before they go down in about 4-5 years. Cities and towns can request a change in the way the actuary calculates annual contribution amounts, but this would mean you would start paying more money now to put more money in the system to pay down the balance. Mr. Ponder mentioned the Center for Retirement Research out of Boston College and their tool for calculating payment and interest rates to allow individual cities and towns the ability to look ahead and better budget moving forward. In terms of Tier 3 being a fix, Mr. Ponder explained the way pensions work is that unfunded liability is everything that has been created for people who exist now and existed before now. In that regard, Tier 3 is certainly a fix in respect to cost prospectively, but the debt created for those who are retired and those who are currently active needs to be paid down. He said Tier 3 is more cost effective for cities and towns moving forward. Mr. Ponder answered clarifying questions regarding contribution rates. From 2003 the assumed rate of return went from 9% to 7.4%, which is the current rate, and each time the assumed rate decreases contribution rates increase for the employer. In addition to that, when the 2011 legislation was passed for pension reform, PBI savings were built in the in the actuarial valuations. When the lawsuits overturned much of SB1609 rates had to increase again because cities and towns essentially had not been paying adequate contributions for four years. In the 2 2016 changes from a PBI to a COLA resulted in a contribution rate increase to account for anticipated future increases to PBI. He noted, the increase in contribution rates due to the COLA were a one-time adjustment and should not happen again moving forward. There will be one more increase in contribution rates next year since they have to account for people living longer. After that is done, cities and towns should hopefully see a leveling out of contribution rates. In response to a question from Mayor Mueller regarding the powers of the PSPRS board, Mr. Ponder discussed how a provision clarifying the PSPRS board powers and abilities in regard to adding benefits. Mr. Strobeck mentioned the 50/50 cost split and how this could also mediate some of these issues since the cost is shared evenly. Mr. Ponder discussed the issue of the Advisory Committee. He has been tasked with looking into the local board consolidation, the final outstanding item from SB1428 in 2016. The Cortex study proposed decreasing the amount of board from 233 to 45. The 45 was split up along county lines as well as allowing the 17 independent lands to keep their local boards. Mr. Ponder benchmarked plans across the country, separated plans between agent-multiple-employer plans and cost-sharing plans, you can think of non risk-pool versus risk-pool. He found that in terms of risk-pool plans, local boards were never in charge of making decisions that would affect the pool. The main point was to not have local boards making decisions that affect the pool, and then have other local boards questioning those decisions. The recommendation would be to have one medical board to assess any disability cases. That proposal was approved in the September meeting. There was to be a meeting in October to discuss whether or not PSPRS could handle all administrative work or could local boards handle some of it, what could the employer handle on their own, etc. At the October meeting, Police and Fire presented their own information which led the committee to rescind their approval of the medical board and have now created a working group to move forward. Executive Director Ken Strobeck introduced John Kross, Town Manager, Queen Creek, to present on the Construction Sales Tax Task Force update. Mr. Kross began to discuss an overview of the important policy considerations and the research the group did. A diverse group came together to represent the whole state of Arizona coupled with a technical, advisory group in order to present a unified and comprehensive report. The direction was to assemble a task force and analyze the implications of the various proposals that have been made over the past few years that would impose tax only on materials, and to calculate the implications of that. One of the first things done by the task force was to understand the various issues and concerns of the stakeholders and participants in this transaction. These concerns served as the foundation for the report: determining the tax liability and the requirements on these construction projects based on which jobs fall under maintenance, repair, replacement or alteration (MRRA), as a part of the 2013 legislation. For prime contractors, the liability for tax is 65% on the gross proceeds and the standard deduction today is 35% for labor based on the gross income of the construction project after all other deductions are taken. With the MRRA jobs, those are taxed on the purchase price of materials only paid through the vendor, or by the contractor based on the job site as chosen by the contractor. Critics often say that Arizona’s tax system on construction is overly complex. In terms of tax compliance and complexity, we feel we were able to debunk those criticisms based on our research of nine other 3 states. One of the states that was researched, Utah, does have a tax on materials, but once researched further, it was noted there are other taxes imposed in Utah that make up for this difference. One of the issues the task force dealt with was responding to the 1999 Arthur Andersen study which essentially says more compliance would make up for any revenue gaps. This claim was debunked and data can be found in Appendix 12. There are three proposals made by the task force for possible legislation if there should be interest moving forward. Each proposal has been held to the standard of six core principles established by the task force: ensure that tax revenues are remitted to the jurisdiction in which the construction activity occurs; any proposal does not amount in a significant reduction in the revenues for the state or local governments; maintains the integrity of other tax systems and policies; provides fairness for all similarly situated taxpayers; is easy to determine tax obligation and to comply with remittance; and prevents tax avoidance by relocating or restructuring businesses.

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